Want Jobs? Forget the Fed!

Matt Yglesias beats a dead monetarist horse – the same defunct nag whose flogged and forlorn carcass should have been cremated years ago – by again seeming to pin the chief responsibility for attacking unemployment on the Fed, and on its supposed control over inflation and inflation expectations. And yet as is often the case with Yglesias, the elected political leaders of the most economically powerful nation in the world rate no mention in his post, despite their scandalous and incompetent failure to address a national employment debacle.

One of Yglesias’s readers asks a straightforward question in the comments section: “Is it strictly necessary to have inflation to have growth?” Now, while I expect correction from a few academic economists on this score, it seems to me that the correct answer to this question is “Absolutely not!”

First, if an economy is experiencing severe unemployment of human and material resources – e.g. if it is an economy such as the economy we are in now – then it is entirely possible for that economy to grow fairly quickly in response to a surge in demand, without a rise in the price level. The economy can match that demand with new output almost right away, without a significant rise in unit production costs. Unit costs might in fact decline due to increased productivity from more efficient use of existing equipment and workers.

And even in an economy running at full capacity, output can continue to grow without rising prices so long as the increased supply of output is not outpaced by increases in demand. The outpacing of supply by demand can and does occur in a humming economy, no doubt. But there is no strictly necessary reason it has to occur.

But setting aside these hypotheticals about the full capacity economy of our dreams, let’s stay focused on our own present-day society with its weird combination of hyper-unemployment on Main Street and hyper-unconcerned politicians and opinion leaders in Washington. Why are Yglesias and other pundits of the neo-monetarist tendency so insistent on pursuing a policy of growth and employment through central bank-engineered inflation? They have in fact experimented with a few different rationales in defending their approach.

Sometimes they forthrightly advocate achieving full employment by reducing labor costs and the real wages of the employed through inflation. But this is not such an attractive route to prosperity given that we live in an economy already characterized by a skyrocketing income gap and surging corporate profits gained on the backs of abandoned and punished poor and middle class workers. So this rationale is heard less frequently these days – at least in public.

Then there is the theory that higher inflation expectations should lead to a “use it or lose it” attitude among savers toward their money. Savers concerned about the declining real value of their money will presumably spend more of it, and spend it more quickly. That is a plausible, if empirically iffy, hypothesis – so long as the inflation expectations rise sufficiently dramatically. The problem is that Yglesias and the other neo-monetarists have never proposed a plausible mechanism whereby the Fed can raise inflation expectations in any significant way. Even two rounds of QE accompanied by large outpourings of Austrian-libertarian caterwauling and garment-rending about hyperinflation doom scenarios didn’t do the trick.

But the monetarist faithful continue to believe and affirm the creed. The source of the Fed’s power over inflation is supposed, they say, to lie in one of two places: The first is the discredited old model of bank reserves providing a finite stock of loanable funds, with the Fed controlling lending levels in accordance with the “money multiplier” by adjusting reserve quantities. This model has been refuted so many times on this blog that another demolition is hardly necessary.

The other alleged source of Fed power consists in verbal magic. The devotees of the monetarist church believe that the money-using multitudes hang on every word of the Fed Chairman, and adjust their behavior in response to words alone, abiding in firm conviction in the economy-wide potency of the Fed’s mighty syllables. Here’s Yglesias’s latest version of the expectations magic approach:

We should probably just retire the term “QE” at this point. What he’s [SF Fed President John Williams] talking about is going back to doing asset purchases, but doing them in potentially unlimited quantities in order to meet a goal. You say, for example, “we’re going to spend BLAH BLAH a week to try to get inflation expectations up to YADDA YADDA and if after five weeks we’re not there yet we’re going to start spending DOUBLE BLAH BLAH.” This is not my idea of what an absolutely optimal policy agenda looks like, but it would work much better than trying to decide how much to buy in advance.What you want to do, after all, is move markets and coordinate expectations. If everyone who pays attention to these things knows where the captain is trying to steer the ship, then they’ll all adjust their behavior in the direction of the new point that the Fed is trying to coordinate towards. If it’s all done through rumors, signaling, and off-the-record chats with key reporters then it’s much harder.

I have never been able to read this kind of thing without being dumbfounded. Outside of the abstract models found in academic papers in philosophy and economics about otherworldly communities of idealized economic agents, where are all of these people who regard Ben Bernanke as the captain steering the macroeconomic ship, and who coordinate their business decisions to fall in with the course plotted by our great capitalist helmsman? I don’t believe I have ever met one personally. Maybe I spend too much time below deck.

Sometimes the Seekers of the Credible Fed Statement argue that the point is not to produce growth via inflation. They reason instead that the Fed needs to signal it will at least tolerate higher inflation so that potential producers and employers aren’t frightened off of their business investment plans by the concern that the Fed will succumb to inflation fears and put the kibosh on growth, nipping the shoots of economic expansion in the bud before they have fully sprouted.

I find this last approach extremely implausible. I just can’t believe that there is any significant number of real-world business people who currently espy a landscape of promising economic opportunity, but who are being scared off of investment by some vague fears that the Fed might do some vague something-or-other in the future to tamp down demand and price pressure, employing some vague and mysterious Fed mechanisms. I can’t say nobody thinks this way, but my guess is that it is mainly some economists – not the bustling hordes of everyday business folk who pay barely any attention to the yada-yadas and blah-blahs emitted by the Fed.

A business will invest in production whenever they are convinced they are going to have customers willing to buy what the business produces, at a price profitable to the business. The biggest and most awesome customer in existence is the US Government. Those given to focus on authoritative verbal statements and expectations management might do well to realize that the most powerful kind of expectations-management we could get right now would come if prominent neoliberals and conservatives like Barack Obama, Simon Johnson, Ken Rogoff, Tim Geithner, Scott Sumner, Bill Clinton, Erskine Bowles, Alan Simpson and others – who are all apparently fighting a desperate war against everyone to their left, an effort aimed at preserving the neoliberal order and fending off any return to activist government and energetic fiscalism – would stop fibbing about the existence of a long-term public debt problem, and advocate dramatic fiscal expansion instead. The most ill-advised and economy-crippling thing Barack Obama ever did was tell the world the US government is “out of money”. He followed up this false and apocalyptic statement with his decision to fight a protracted war with the Republicans over how best to contract government spending over the long haul. He might as well have told us all that the most important customer in the whole world had just died.

If anyone deserves to be looked upon as the nation’s “captain” it is the President of the United States, and Cap’n Obama needs to reverse course. His faux-responsible budgetary fear-mongering and demoralizing visions of long-term penny-pinching underline and accentuate the even more radical fear-mongering and austerity-hawking of the Republicans. The bipartisan gloom and doom has lowered a cloud over the whole economy. It is slamming business and consumer confidence, and blighting expectations for the future.

There is no long term public debt problem for a country like the US, since the US is – unlike some of its unfortunate European friends – the sovereign issuer of the nominal medium of its own debt. Solvency is no challenge for the US, and borrowing is not required. President Obama should tell the world that if elected along with a Democratic Congress, he and his Democratic colleagues are planning to spend a great heap of public money on everything from eradicating global warming to building bridges to nowhere and escalators on Mars. And he might remind them at the same time that Mitt Romney will likely do the same thing, since the Republicans have a clear track record of believing that deficits matter only when Democrats are in power, and switching to the view that deficits don’t matter once Republicans are in charge.

It’s time for government to go big in its fiscal campaign. Damn the debt and full speed ahead. At the very least, the mere announcement of this born-again fiscal enthusiasm should wake up the hyperinflation hyperventilators – and maybe before a single additional dollar is spent we will get some of those elevated inflation expectations Matt Yglesias says he wants.

46 Responses to Want Jobs? Forget the Fed!

The old fashioned Wage Fund Theory is still being assumed as being the basis for the “creation” of new jobs! Whilst this device seems obvious to would-be entrepreneurs, when taken in a macroeconomics context, without any bias towards the money side, it should become clear that this way of thinking is not true. Without the continual harping back to its assumption, many economists somehow choose to neglect the actual way that jobs are created and the money that is earned during the production process comes not from the pockets of the employer but from the added value put into the produce. For this reason it is possible for a new business to commence without the need for having a wages fund, all it needs is access to land, some limited durable capital (buildings, tools, vehicles etc) and the willingness of workers to invest some time and effort. After some goods have been made, their monetary value can be borrowed in order to pay the earnings and no prior fund is needed. With barter its even easier and some of the product itself is the wages!

The reason for a lack of work not being due to a money bottle-neck must be due to a lack of opportunity and this is what monopolists in land and to a degree in capital goods, are doing to the progress of the nation. By speculating in land values and holding the land out of use, these fat cats restrict the amount of competition and raise the cost of the produce, due to the high returns being paid on the limited resources being available. The competition for access to land raises its rent and consequently the price of the product.

It has nothing to do with the way the bank operate, it is simply due to a physical limitation on using the available land. By taxing land values instead of earnings, purchases and capital gains etc., the speculation in land values would cease, costs would reduce, greater employment follow and prosperity flourish again. As long as the monopolists continue to control the spread od knowledge about how this aspect of macroeconomics fails to work properly, will the banks get the blame!

So… progressives should vote for Romney, knowing that the bottomless hypocrisy of the big-government Republicans is really the lesser evil, compared to the deadly-serious grand-bargaineering of the corporate Democrats.

Great job of showing the NEED for new ways of looking at how it may be possible to ensure growth in jobs without resort to the Fed’s dread of inflating the reserve balances of banks that don’t NEED them.
The focus here seems to be on ‘fiscal’ actions that see more certainty established via direct government expenditure that will effect the money system at the location where increased demand will directly cause an increase in employment.
The claim is made that this ‘fiscal-monetary’ action is a defeat of the monetarist view of using the money supply to effect broad economic policy objectives. But it merely uses the fuller-employment target to direct government expenditures, apparently by issuing more debt to fund the deficits.
First, repeating, many monetary economists proposed the same vehicle – direct government expenditure to put idle resources to work – and did so with the stated purpose to increase the money supply without the issuance of more debt. The government creates the money to fuel the job-creation.
What is needed to achieve that objective is a public money perspective at the center of monetary policy actions, in place of the banker-owned and operated, trickle-downers at the Fed.
The Kucinich Bill, the National Emergency Employment Defense (NEED) Act of 2011, establishes just such a public money administration, and does so for exactly the purpose laid out in this post.
So, yeah, Forget the Fed.
And start to think, Public Money Administration.
And an end to public debt.

I am posting from Asia.
Those Monetarists, Market (e.g., Scott Sumner ) and New (Steve Williamson ), are pretending that they know how to solve the problem. But the most unfortunate thing for the world economy is that we have a new kind of Monetarist: Oppotunistic Monetarist. I mean Mr. Barack Obama.

My understanding is that the National Debt is a relic of the gold standard. What do you expect would happen, economically, if the United States decided to longer issues debt (T-securities)? Would those dollars primarily sit idle as Reserves? Would those dollars primarily create higher asset prices (bubbles)? Would those primarily flow into the stock market?

Also, if the reason China holds so much of U.S. National Debt the result of our trade imbalance, what should we expect China to do with their dollars if they no longer had the risk-free savings account called U.S. National Debt (Treasuries).

Last question, would it be possible to provide risk-free interest bearing assets for domestic issues (e.g. Social Security protection), but not make those assests available to foreign entities? My thinking is: when we send dollars throughout the world via our current account deficit, why don’t we force foreigners to use those dollars? Why do we give them a risk-free interest bearing assets in U.S. Treasuries?

The short answer is this (my understanding): when dollars were backed by gold, the U.S. government had two (legal) means to aquiring funds in order spend: 1) through taxation, or 2) through issuing debt. So, the national debt is a relic of the gold standard because that is how the U.S. government would aquire the funds to spend more than it brought in through taxation.

With money no longer backed by gold (i.e. nonconvertible), there is no operational NEED for the U.S. government to issue debt. Since gold isn’t needed to back up any new money creation, then taxes and issuing debt or no longer necessary for the U.S. government to spend… it’s done via keystrokes… “out of thin air” …

What I described is (I think) what MMT would call the “general case” …

I bring that up to say this: it may still be that current law stipulates that the U.S. govenrment must issue debt (Treasuries) in order to spend more money than it brings in via taxation. If so, that is a self-imposed contraint. i.e. it is a relic of the gold standard.

To JK
I’ll just add this.
It IS still the law that the government must borrow its non-tax revenues in order to spend.
As I said, it has been so since our birth as a nation sovereign in money.
Every law in existence in any nation that is based in law is a self-imposed constraint.
That’s why the Anarcho-capitalists hate government – they make laws.

The only other type(non-self-imposed) of constraint on monetary operations in its real sense is one externally imposed, and this would violate the definition of a sovereign monetary state.
Sorry again, our 200+ year old laws on the public debt are not a relic of the gold standard.

Again, we can achieve all that MMT envisions without the catchy slogans that are based on these misconceptions. Why don’t we?
Thanks.

Thanks, JK
Perhaps to the limited view of MMT, that make sense.
Anything that might get in the way of the public benefits envisioned by the theory is a ‘self-imposed constraint’, which usually means it is another law that NEEDs to get changed in order to actually achieve the public bounty.
To say that the national debt is a relic of the gold standard goes beyond even this license of constraint-ism.
As explained in Stephen Zarlenga’s book on The Lost Science of Money, as we lost out to the Hamiltonian vision of a private Central Bank, the GOVUS was $6 Million in debt before it minted the first coin of the new sovereign.
And in the study of ‘the gold standard’, it was only officially adopted (1900 – An Act To define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States) as the backing of the paper currency in this country about 110 years after the issuance of the first public debt.
It’s hard to accept that something(debt) is a relic of something(gold standard) that did not exist until a hundred years later.

The law of the land that required our government to borrow its non-tax(fee, other income, etc) revenues goes back to the day the Department of Treasury came into existence.
So, the issuance of public debt can only really be called a relic of our country’s founding – and not a relic, because it is still valid today without exception.
To say that anything significant regarding the national debt changed when we went off the gold standard in 1933 is a bit folly.
The gold standard was not what caused the debt.
Finally, with all due respect to my MMT friends, NO, the government (Treasury Department as paying agent) does NOT create money via keystrokes.
It may be able to do so with a change in the law so that the amount of money so created is defined in the law and authorized by the Congress who oversees spending.
It SHOULD be able to do so via that means.
And it WOULD be able to do so with passage of HR 2990, the Kucinich Bill that actually reforms the money system. Not by magic, but by law.
Thanks.

Just to be clear.. I don’t speak for MMT. What I say is merely my understanding to date.

With that said, I think you misunderstood what I meant by self-imposed constraint. What I meant was… there was a logical reason to issue debt for spending beyond tax receipts: with the dollar fixed to gold ($35/oz), creating new money into existence without there being more gold would destroy that fixed rate, i.e. the fixed rate couldn’t be exactly convertible. Whereas without gold, or any commodity backing up the money, there is no logical “need” to issue debt. That’s it.

On the semantics, in response to this: “the issuance of public debt can only really be called a relic of our country’s founding – and not a relic, because it is still valid today without exception.”

I think the use of “relic” is valid. A quick lookup of the definition: “An object surviving from an earlier time” … i.e. the issuing of debt has survived from an earlier time when the issuance was logically necessary in order to maintain the fixed exchange rate. Just because issuing debt still occurs, doesn’t mean it’s not a relic.

“NO, the government (Treasury Department as paying agent) does NOT create money via keystrokes.”

Sure it does. The Treasury creates a bond, sells it the Primary Dealers (at which point it enters the non-government sector), the PD’s echange money for the bond, that money enters government bank accounts from the PD’s bank accounts (electronically!), which it is then spent into the economy. Isn’t this all done electronically?.. by keystrokes? I’ve never bought a U.S. Treasury, but I’ve assumed it’s done electronically. And even if it wasn’t, the point remains: the use of the word “keystrokes” seems to be shorthand for “out of thin air” or ..’not in proportion to a metal that was dug out of the ground.’ Do you disagree with that?

I didn’t mean to infer your speaking for MMT.
It’s only a theory used for explaining what is, macro-economically speaking.

Yes, I think I disagree with all of that except that keystrokes do change things.
That’s why we type.

Staying with the keystrokes, my point was not about the keystroke part – it was about the “government creating money’ part – like when it uses the keystrokes to make ‘paying agent’ transactions for goods and services, it does not create money.

When Treasury makes payments, it uses keystrokes – as do banks and a lot of consumers paying their bills – for the majority of money-denominated financial transactions these days. The accounts are in electronic media. Let’s not go overboard with the technology.

My point throughout the issuing-debt and collection-of-taxes discussion is that the government merely USES the money that has been created previously by the private bankers.
The bankers are the money-creators.
The government is the money-user.
There is no proof offered that the government does not need “money” in its TGA accounts before it can spend.
Plenty of proof exists that this is the case – regardless of whether the government’s money comes from taxation or issuing debt.
So, to close this point.
“NO, the government (Treasury Department as paying agent) does NOT create money” when it spends, via keystrokes or otherwise.
Sure, it could.
After passage of the Kucinich Bill.
To ‘legalize’ it.

There’s a certain irony here.
“”The Treasury creates a bond, sells it the Primary Dealers (at which point it enters the non-government sector), the PD’s exchange money for the bond, that money enters government bank accounts from the PD’s bank accounts (electronically!), which it is then spent into the economy.””

If I follow correctly, the money that is eventually SPENT into the economy enters the Treasury’s TGA account via transfer FROM ‘somebody-else’s’ account where it exists before the government asked for the Treasury Bonds to be printed.
So, yes, a bunch of ‘electronic’ transactions take place with money already in existence. But, even if the banks JUST created the money to buy the Treasuries, there was no government money-creation.
Just government debt-issuance.
Held and traded by the bankers.
Who create the money.

Your defense of the word ‘relic’ ignores my point that government-debt issuance was NEVER related to the Gold Standard which came 100 yrs AFTER the government was required to issue debt because we set up a private ‘central’ bank.
A ‘relic’ is of something no longer in place or use.
Government debt-issuance has ALWAYS been in place.
Still is.
It is a relic of itself.

I understand your point that the U.S. government is technically using bank-money when it deficit spends… so “who’s the creator?” Because of this, you seem to be discounting the U.S. government’s ability to create money. I only see it as a semantic criticism…

No matter how much bank-money is ‘in existence’ the U.S. government never has an inability to create new net financial assets through bond sales and subsequent spending. Therefore, to me, it seems logical to say the U.S. government does create money (new net financial assets). When you note that the U.S. government uses bank-money in the process, it’s somewhat irrelevant. Don’t get me wrong… I think it’s important to know exactly how operations occur. But the necessary precision of description changes based on different levels of analysis…

From the level of analysis of Sectoral Balances (government, domestic non-government, foreign), it makes sense to speak simply of the U.S. government creating money. That is, it’s irrelevant that the U.S. government USES bank-money in order to create new net financial assets. Indeed, it complicates and muddies the understanding to bring that into the discussion because ultimately it doesn’t really matter. For understanding Sectoral Balances, it does not matter whether the process is entirely vertical or a combination of the vertical component harnessing the horizontal (bank-money) component.

Now, if the U.S. government (the vertical) were somehow constrained by banks (horizontal) willingness to partake in the transaction, THEN I think it would be illogical to speak simply of the U.S. government creating money. But so long as there is no constraint, when at the level of analysis of Sectoral Balances, I think it’s useful and sufficient to ignore the horizontal (banking) component.

It’s not that the precise operational mechanisms that you highlight are not important. I think they are. It’d be ignorant to speak of the U.S. government creating money WITHOUT also understanding how it uses bank-money in the process. But again: the necessary precision of description changes based on different levels of analysis.

Where do you disagree?

(I’m going to ignore the ‘relic’ disagreement. The money-creation discussion is much more interesting.)

JK
Thanks.
I’m always bemused when any MMT discussion of the “monopoly issuer of the currency” paradigm turns TOWARD the banker-oriented flows of “net financial assets”, a.k.a. the monetary assets that ‘financialized’ our global economy, and AWAY from how the money system actually works. The MMT founding on the “unit-of-account” monetary function, rather than the “means-of-exchange” function, results in glorification of irrelevant growth in assets, rather than currency.

This is only important to a couple of major point here.
One is the subject of Dan Kervick’s post, which is that the FED is incapable of creating ‘money’ that is needed to increase aggregate demand and put people back to work.
Want jobs? Forget the Fed.
Because ALL they do is create net financial assets.

The other is a fixation on the subject of a causal relationship between the “gold standard” and a lack of monetary autonomy, called ‘sovereignty’ in the jargon of MMT.
This discussion began with your “understanding” of the “fact” that government debt finance was IN ANY WAY related to the gold-standard.
I have shown by legal, historic facts that government debt finance has been a requirement and a reality since the inception of a public Treasury in this country about 220 years ago.
Meantime the ‘gold-standard’ was in effect for a little over30 years.

So now you want me to agree or disagree that when the government finances its operations through mandatory debt issuance that it “increases” the amount of “net financial assets”.

As a government debt instrument is a “financial asset” that did not exist before issuance, yeah there is an increase in net financial assets.
But there is ZERO increase in the money supply as the GOVUS simply “uses’ private bank-credit money previously created.
So, how does that solve for increasing aggregate demand?

To be clear, the deleveraging taking place due to a saturation of consumer-business debt is a direct cause of the there NOT being money available to fund the growth in aggregate demand that is needed.
And the fact that the reduction in debt is causing this reduction in “money” is directly related to the debt-based money system, affectionately referred to as endogenous money by MMT.

What we NEED is money without debt – the DIRECT, budgeted, targeted issuance of MONEY by the government to support GDP potential and put people back to work, as called for and provided for in the Kucinich H.R. 2990 monetary reform legislation.
But for some reason, that is a non-existent paradigm for discussion in the circles of the functional financialists.

(1) Will you elaborate on this: “The MMT founding on the “unit-of-account” monetary function, rather than the “means-of-exchange” function, results in glorification of irrelevant growth in assets, rather than currency.” ?

(2) In the following paragraph, in response to Dan’s point about the Fed’s inability to stimulate aggregate demand, you say “Because ALL they do is create net financial assets.” Who is “they” ? If you’re referring to the Fed, which is the entity that paragraph was talking about, then that is incorrect. MMT does not say that the Fed creates net financial assets. The opposite: the Fed doesn’t create net financial assets; only deficit spending creates new net financial assets. The Fed only does asset swaps (but… as of recent Congress has instructed the Fed to credit accounts with interest on Reserves. To me, this sure sounds like creating new net financial assets. It sounds like a form of deficit spending, i.e. a fiscal operation. I don’t know where MMT stands on this).

(3) “This discussion began with your “understanding” of the “fact” that government debt finance was IN ANY WAY related to the gold-standard.”

In my mind, there is still a LOGICAL connection between debt-finance/issuance and the gold standard. Just because debt issuance went back further than the gold standard, doesn’t say much to my point. What it might say is this: before convertibility it was illogical to have debt issuance, then during convertibility it was logical to have debt issuance, and now after convertibility it is again illogical to have debt issuance.

For now I’ve been taking your understanding of the history of debt issuance as accurate. Assuming that it still is, what was the LOGIC of issuing debt prior to convertibility? Also, do you see my point that there is a logic to debt issuance during convertibility?

(4) “But there is ZERO increase in the money supply as the GOVUS simply “uses’ private bank-credit money previously created. So, how does that solve for increasing aggregate demand?”

This seems like it’s related to (1) above. I think the creation of new net financial assets changes the composition, or the form, of (some of) the money in existence… and in so doing increases aggregate demand. MMT says something like ‘it is much different if you have $100,000 in cash, than if you have a $100,000 loan from a bank.’ So, what U.S.Gov creation of new net financial assets does is change the composition of (some amount) of money in existence from a loan owed to a bank, to cash. In so doing, it seems that it improves the balance sheet of the private sector, which (I guess) provides the conditions for an expansion of bank-money. Said another way, the creation of new net financial assets “gives” the private sector better “credit-worthyness” …and as a result, the banking sector is able to create more loans/deposits and stimulate aggregate demand.

It seems like expanding bank loans is like a house of cards, that sooner or later without the injection of sufficient new net financial assets, it will collapse. And this is precisely what happened in the recent housing bubble/financial crisis: the private sector became too overleveraged because new net financial asset creation did expand fast enough to keep up with the ‘house of cards’ …

(5) “What we NEED is money without debt – the DIRECT, budgeted, targeted issuance of MONEY by the government…”

I agree. The process would be simpler and more efficient with direct money creation minus the merry-go-around of new net financial assets created through using bank-money.

JK : “Will you elaborate on this: “The MMT founding on the “unit-of-account” monetary function, rather than the “means-of-exchange” function, results in glorification of irrelevant growth in assets, rather than currency.”?”

Reply – In MMTs sense of what ‘money’ is – in its science, history and legal foundations – the Theory has a focus on its “unit-of-account’ function; therefrom becoming in MMT the ‘money unit of account”, and further construed FROM a credit-and-debit bookkeeping (accounting) identity TO a DEBT. Thus, Money IS debt to MMT. (Although later you may agree that issuing money without debt is what is NEEDed.)

I contrast this with the national monetary system function of money as the means of exchange for goods and services in the national economy (See DelMar’s The Science of Money and History of Monetary Systems, etc and Soddy’s The Role of Money) . By taking the MMT approach, we lose the ‘monetary power’ – that of defining the money system as the nation’s most powerful tool for development of the economy. From such a monetary system perspective, the unit-of-account function is clearly of secondary importance – thus are any accounting identities.

JK : “The Fed only does asset swaps (but… as of recent Congress has instructed the Fed to credit accounts with interest on Reserves. To me, this sure sounds like creating new net financial assets. It sounds like a form of deficit spending, i.e. a fiscal operation. I don’t know where MMT stands on this).”

Reply – On this and the question of whether the Fed creates financial assets, I see only Asset Swaps, Balance Sheet Expansion, Excess Reserve Creation (with or without interest) as Fed policy initiatives. None of this puts money as we know it (M1) into the real economy to increase aggregate demand. I should not have stated that the Fed created net financial assets when targeting that they don’t create any usable money for our economy.
Policy actions by the Fed are impotent to repair the plight of our jobless Americans. The Fed plays DIRECTLY in the banker/financial world of assets and liabilities.

I believe we all advocate DIRECT government spending to fund new aggregate demand. Reformers take government borrowing off the table for that funding, and replace it with direct money-issuance.

JK : ““This discussion began with your “understanding” that government debt finance was IN ANY WAY related to the gold-standard.”
In my mind, there is still a LOGICAL connection between debt-finance/issuance and the gold standard., what was the LOGIC of issuing debt prior to convertibility? “

Reply – I should do what Warren does here. See Hamilton.
But, more respectfully, it WAS that Hamilton won the debate about establishing the new nation’s money and banking system, thus enabling a private central bank of issue, and requiring that the Treasury must borrow any needed balances before spending.

Such goes into the law establishing the Treasury. It does not require LOGIC; merely conformity or amendment.
Public money advocates have been saying since the Colonies that it NEVER made any sense for any government to borrow the currency it has the power to issue.
But if it doesn’t issue – and of course I say that the government does not issue the currency in service of the commerce of the nation – then it MUST get its revenues from somewhere.
Warren says he wishes the Fed didn’t have the overdraft rule.
As if THAT were the basis of the NEED for the GOVUS to borrow.
It’s laughable, but currency at the Center.

JK : “Also, do you see my point that there is logic to debt issuance during convertibility?“

Your point on convertibility LOGIC was:
“”when dollars were backed by gold, the U.S. government had two (legal) means to acquiring funds in order spend: 1) through taxation, or 2) through issuing debt.””

Sorry, but no, I don’t see the LOGIC.
Since the GOVUS always had those 2 requirements, and it still has it, the ‘convertibility period’ LOGIC is kind of moot. Respectfully, nothing changed that made them borrow more or less..

Joe : “But there is ZERO increase in the money supply as the GOVUS simply “uses’ private bank-credit money previously created. So, how does that solve for increasing aggregate demand?”

JK : This seems like it’s related to (1) above. I think the creation of new net financial assets changes the composition, or the form, of (some of) the money in existence… and in so doing increases aggregate demand.

Reply – There’s a lot in your explanation following this point that I do not really understand, perhaps given my non-acceptance of certain MMT tenets involving money, and especially THAT the GOVUS creates new money when it spends. I’ve never really seen that explained in detail.

On the specific item mentioned, I do understand that the issuance of the security FROM the GOV into the private market, in exchange for bank-credits, gives the market another GOV asset that did not exist before. But to me, it only changed the forms between the publics and the privates.
Cash in the bank is a private sector asset.
Savings in the bank is a private sector asset.
Using either (converted to cash) to purchase a government security and holding that security does not really change the net worth of the holder, merely the form of the holding. And it merely gives the GOV the use of the already created, or saved, bank credit money.
Perhaps I just don’t understand the arguments for how wrong that is.

Joe : “What we NEED is money without debt – the DIRECT, budgeted, targeted issuance of MONEY by the government”
JK : I agree. The process would be simpler and more efficient with direct money creation minus the merry-go-around of new net financial assets created through using bank-money.

You agree, but the laws of the land NEED to be changed to make that belief legally effective.

Correction: “And this is precisely what happened in the recent housing bubble/financial crisis: the private sector became too overleveraged because new net financial asset creation DIDNT expand fast enough to keep up with the ‘house of cards’ …

JK to Joebhed quote , “MMT says something like ‘it is much different if you have $100,000 in cash, than if you have a $100,000 loan from a bank.’ ”
The basic difference is that the $100,000 in the bank has a value of $100,000 in goods and services. When the bank via Fractional Reserve Banking at 10% reserve lends out
90,000 which now creates a “potential value of $190,000 on that $100,000 deposit, thereby actually “printing $90,000 out of thin air. The kicker is that at 2% for 36 years the private for profit bank receives an income of $180,000 as a return on stored currency that the bank never owned, plus whereever that $90,000 is deposited,that bank can repeat the cycle by lending $81,000.
As Wm Black says,”The best way to rob a bank, is to own One.”
“Don’t End The Fed, Amend The Fed”.

Sorry… don’t mean to kick you out of this back and forth… but you’re bringing into it an issue that I think neither Joebheb or I agree with; that is… that bank deposits create loans. It’s the other way around… bank loans create deposits.

I’m sure I am missing something but here goes. So this fella John borrows money from the bank. He then uses the money to buy a tsy bond. The Treasury now uses the money to buy flowers from John. John now uses the money to pay off his loan at the bank.

So at the end of these transactions the bank has no loan and no deposit. The treasury has dead flowers and a bond outstanding and John has a tsy bond. New financial assets (the bond) has been created. Assuming the government has issued money into the economy John can sell his bond for cash, new cash that did not exist before. The bank faciliitated the transaction but is not essential to it.

“What did I miss?”
Actually, I’m not sure what point you were addressing.
Nice to start there.

But in reading over your scenario: forget John, forget the bank-created money loaned, forget the Treasury bond and the flowers, it all boils down to this.

“Assuming the government has issued new money into the economy….”

That’s a pretty broad, and unfounded in your postulation, assumption.
It appeared that the government USED the bond proceeds to buy the flowers, creating NO NEW MONEY.

If you want to say –
‘Assuming the government issues NEW money into the economy’ – which IS of course what we propose in the Kucinich Bill – then anything is possible.
I never assume that, as I have never seen it happen.
Have you?
Thanks.

“Assuming the government has issued money into the economy John can sell his bond for cash, new cash that did not exist before.”

On what do you base this assumption? Earlier in your description the Treasury created a bond, and recycled bank-money in the process. But here at the end, you’ve assumed the government has issued “new cash that did not exist before” …

Where did this new cash come from?

This is precisely what I’ve been trying to wrap my mind around: does the U.S.Gov ever inject new cash, i.e. “spendable” money, into circulation? Or actually does all cash come out of the loan creation process? That is, does the new net fianancial assets (the Bonds) created by the U.S.Gov merely improve the private sectors balance sheet?…in order for the “house of cards” to continue to be built higher… more and more bank money via the credit creation proces?

****”What we NEED is money without debt – the DIRECT, budgeted, targeted issuance of MONEY by the government to support GDP potential and put people back to work, as called for and provided for in the Kucinich H.R. 2990 monetary reform legislation.
But for some reason, that is a non-existent paradigm for discussion in the circles of the functional financialists.”,joebhed.
Yes, yes, why is it no one talks about the “elephant in the room”?
1. Private banks, that is private for profit financial institution charging a monetary sovereign nation compound interest (a self destructive poison pill) for the issuance on their own currency.
2. Private banks, that is private for profit financial institutions using “future potential issuance” of the nation also leveraging that currency in order to make a profit which they keep,knowing that if their losses are excessive the payment of the losses are paid by the government of the nation.
Perhaps these are “flaws” in our present system. Time to perhaps make a real change.
Excerpts from “Don’t End The Fed, Amend the Fed”
Separate private for profit financial institutions from a governed Central Bank.

RE: ” What do you expect would happen, economically, if the United States decided to
(NO) longer issues debt (T-securities)? ”
Justaluckyfool would answer and wish for profound confirmation as to its correctness, “The US would actually correct one of its major flaws of American Capitalism. It would stop paying interest on its own money which may be a means of self-destruction as compound interest may be a most powerful weapon that could lead to servitude, an antithesis to capitalism.

It could also lead to correcting another major flaw by leading to the separation of Private For Profit

Financial Institutions which are guaranteed the value of their issuance of the Sovereignty’s currency. Perhaps, Keynes, Minsky, Mises, Desoto and many others seem to agree.

Justaluckyfool asks a foolish question in hope that you could provide a profound answer.

Would a monetary Sovereignty solve its unemployment and lack of job creation if it were to make low cost loans to corporations in lagging sectors at a rate and terms that would allow that sector to increase productivity and profit yet maintain price stability?

Example: Be the direct lender to the housing and construction industry from a pool of $2 trillion.

As most economist would agree a loan asset would not be booked as a deficit as well as that the Fed can purchase an unlimited amount of assets it needs to accomplish its mandates-quality and quantity control of the currency and employment.

With the Fed being the direct lender, instead of guaranteeing the loans for the private for profit banks, they (Fed) can do it for 2% for 36 years. This would allow a lower “cost of production” since whatever goods or services are required, the start up funds are less expensive for surely any for profit financial institution would be at least 4% cost (double).

This one move would insure greater profit which also would insure more employment.

After answering this question profoundly, please then answer an additional two questions?

1. What if in addition to the direct lending which would reduce production costs, we were then able to eliminate all federal personal income taxes. Wouldn’t this give a wage increase to the employed

without an increase in labor cost, as a matter of fact eliminating FICA would also give the producer an increase in profit without any damage to price stability ?

2.Can we “create a way to increase revenue and at the same time reduce federal income taxes to zero?

The “Invisible Hand” is reaching out to us (US) and we are approaching an opportunity to

“Don’t End The Fed, Amend the Fed’ (by justaluckyfool with excerpts from Steve Keen, Michael Hudson, and quotes from others)

Read it, Google it and please,please profoundly improve it so that it could be for the betterment of mankind.

First of all, the inflation strategy has worked – on the asset side. There is little doubt that asset prices (not all, but many) have been propped up by QE and related programs.

The problem I have on the inflation targeting scheme is the unspoken assumptions about where increased spending is supposed to come from. People are hoarding money or incomes will somehow rise with increased inflation of consumer goods. I guess one might add an increased “wealth effect” from rising asset prices leading to more private debt, but does anyone seriously hold that view today?

This is classic pushing on a string – the vast majority of US consumers are spending in relation to their income. If prices rise, spending will decrease, pushing prices back down. Unemployment rates ensure that wage incomes will stay depressed.

If you want increased spending, then you need increased incomes, then you need the government to offer jobs, the private sector cannot in this environment.

And where does the government find the money to “create” the new jobs from? Youv’e guessed it, the tax payer! Now you can’t have two benefits coming from the same place. Either the untaxed public enjoys a big spend and lots of goods, whilst the poor unemployed buggers get nowt, or the government taxes the spend-free earners and the same quantity of money keeps the poverty-struck noses in the gravey, whilst the middle class wonder where their job status lays.

In other words there is a limited quantity of money in circulation and its distribution will not have any OVERALL effect on stimulating the macroeconomy. It must be something else that is slowing down the system. Dare I hint what it is? Land ownership and speculation in our lost opportunity!

“And where does the government find the money to “create” the new jobs from? Youv’e guessed it, the tax payer!”
THAT DOES NOT HAVE TO BE.
Excerpts from….Don’t End The Fed, Amend The Fed.
Zero Income Taxes,The Way To Eliminate Poverty and Secure Prosperity For All.
by justaluckyfool
Summary
To lower taxes,you must raise revenue somewhere.How does a government fund, “a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce personal income taxes to zero ?
(as stated on ” 60 minutes” (12/11/11)”
President Obama said,”You can’t raise revenues by lowering taxes unless you get the money from somewhere else.” ?
YES, JUST COLLECT INTEREST ON OUR OWN MONEY, INSTEAD OF TAXES !
Read the detailed instructions…”Don’t End The Fed. Amend The Fed”.
As Einstein said, “Make it simple”
1. End Fractional Reserve Banking, the Feds need only to raise reserve requirerments to 100%.
2. So as to prevent collaspe of monetary system the Feds are allowed to create a pool of $100 trillion or whatever is needed to LEND the banks at 2% interest compounded for 36 years not deficit spending as it is an asset purchase.
I hope you read it and try to imorove it.

I found this interesting paper on an application of Gresham’s law –thanks to Wikipedia for this:
Gresham’s law is an economic principle that states: “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”[1] It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”
In taking that philosophical understanding and applying to political decision making
Cheryl Boudreau, Assistant Professor, University of California, Davis, Department of Political Science found this startling discovery in research that she did:
Nonetheless, the results indicate that a version of Gresham’s Law
may operate in the context of political communication.1 That is, when a credible source suggests
the welfare-improving choice and a less credible source simultaneously suggests a choice that
will make subjects worse off, subjects make worse decisions than when only the credible source
is available. This occurs because subjects tend to base their decisions upon the less credible
source or not make decisions at all and, thus, forego participation. This also occurs mostly
among unsophisticated subjects, who are more easily led astray. These results are surprising
because, theoretically, subjects should simply ignore the less credible source. That said, subjects
still make better decisions with conflicting information than with no information or with
information suggesting a choice that will make them worse off.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1017977

As long as Fox news, a very unreliable source, continues to say that government deficits are always and forever and everywhere always bad, guess what?

Great blog posting, Mr. Dan!
Sadly, I think people are finally realizing this economy, or what’s left of it, has been restructured away from a consumer-based economy, to a fantasy finance based economy.

It was a long time in coming, and to understand the long view or macro picture, may I suggest the following books:

Nice post Dan. There is indeed a good chance Romney will take action to increase the deficit bc he is not as stupid as he appears. On the other hand, his party has been captured by the extreme right wing. Best thing for him would be a democratic congress. Sort of odd. So Obama is just being foolish. I agree he should announce he is going to build escalators on Mars and bridges to no where. We are in a period now where both parties won’t tell the other one where the rest rooms are.

Jonf — What evidence do you have that Romney is not as stupid as he appears, and that he will take action to increase the deficit? He seems like a good front man for the increasingly fascist Republican party — one who is willing to do whatever it takes to for corporate America to strengthen its control of the government. I think this is stupid, since corporate America needs an independent government to avoid the type of disasters that befall fascist regimes.

I predict Obama will defeat Romney and the Republicans will double down in their attack on the economy. Obama is similar to Abraham Lincoln. The Civil War was fought over the issue of slavery, but Lincoln’s priority was trying to get everyone to get along. The slave states rightly perceived that the rest of the country and world was against them, in spite of Lincoln’s moderate policies. We have a similar situation today with a coalition of southern, rural, suburban, and aristocratic Americans realizing that their privileged position is hated by much of the country and the world. They lash out against Obama as if he were the embodiment of the real feelings of the majority, instead of being a figure who just wants everyone to get along and maintain the status quo. As the slave states overreached in 1861, so the Republican fascists are overreaching today with their absolutely crazy policies and criticisms of Obama. They are doomed, but won’t go down without causing untold destruction. I certainly wouldn’t count on Romney having a secret plan to fight them once he gets elected. Rather, it seems he will do everything in his power to further their agenda…

I think Romney is playing to his right. When he was governor, he had no problem with Romneycare despite his current protestations against it today. Further, the republicans never had problems with deficits until now. Maybe that will continue, but Romney may be more moderate than he lets on and if the democrats control congress he could go along. That is not a prospect I want t take a chance with though.

There is always a chance the democrats do not control congress. In that case all bets are off no matter who wins.

Sorry… don’t mean to kick you out of this back and forth… but you’re bringing into it an issue that I think neither Joebheb or I agree with; that is… that bank deposits create loans. It’s the other way around… bank loans create deposits.

The 100,000… to 90,000… to 81,000… has been disproven. That’s not how banks operate. Read this: http://bilbo.economicoutlook.net/blog/?p=10733
Am I to understand that “Fractional Reserve Banking” has been disproven?
When a bank loan becomes a deposit, where does it get the “money” to deposit. It has used the “stored money” of a depositor to make the loan does bank A deposit that money in bank B?
Or is it that we the people have legislated that the full faith and trust of our government will make that deposit if ever needed? Banks and financial institutions have $800 trillion (potential credit expantion)
in derivatives (OK, that a zero sum game so if 20% is needed to deleverage the $800 trillion, wher is th $160 trillion deposited?

I read your recommendation ,found a very interesting comment by …

joebhed says:
Saturday, July 17, 2010 at 0:12
Dear Bill

I hope you don’t mind a little monetarist heresy thrown in here – a monetarist by my definition is someone who believes a simple maxim: It’s The Money System……I never call people stupid.

My reading of this yet another excellent post is that it provides proof positive that the ‘money-multiplier-mechanism’ is flawed by the concept of pushing on a string – the result being a lack of adequate circulating medium given humongous quantities of excess reserves.

The last time I raised some basic monetary reform principles with you, the dialogue got a little confused by your presentation (oft-repeated) that monetarists are proven failures and casting most of them in the Austrian camp. I have tried several times to get you ready for the attack from the left-flank and that s why I’m here today.

The so-called fractional-reserve banking system, more correctly the private system of public-servitude using debt-based money, is the cause of both the deficit-mania you often challenge here and the evolving recession-soon-to-be-depression.

I very much appreciate your realism that a sovereign national monetary system is capable of creating the money needed for public purposed economic objectives like full-employment and the rest. Sorry, Bill, but you guys are missing the boat. It’s the Money System.

Whereas you prove by research the fallacy behind one of the neo-liberal monetary economists tenets regarding the money-multiplier, it was painfully self-evident to the authors back in 1939 and they wrote the purpose of the Program as:
“It is intended to eliminate one recognized cause of great depressions, the lawless variability in our supply
of circulating medium.”

Lawless-variability equates with a broken multiplier.

Their solution has many of the elements I have advocated for here occasionally.
They have this to say relative to fractional-reserve banking:

The Fractional Reserve System
(9) A chief loose screw in our present American money and
banking system is the requirement of only fractional
reserves behind demand deposits. Fractional reserves give
our thousands of commercial banks power to increase or
decrease the volume of our circulating medium by increasing
or decreasing bank loans and investments. The banks thus
exercise what has always, and justly, been considered a
prerogative of sovereign power. As each bank exercises
this power independently without any centralized control,
the resulting changes in the volume of the circulating
medium are largely haphazard. This situation is a most
important factor in booms and depressions.

Bill, and other progs, please note – “what has always, and justly, been considered a prerogative of sovereign power”.
Of course, this creates two imperatives for those noted economists – one is with what do we replace the fractional system?

The 100% Reserve System
(10) Since the fractional reserve system hampers effective
control by the Monetary Authority over the volume of our
circulating medium it is desirable that any bank or other agency
holding deposits subject to check (demand deposits) be required
to keep on hand a dollar of reserve for every dollar of such
deposit, so that, in effect, deposits subject to check actually
represent money held by the bank in trust for the depositor.

And then, having removed the ability of private bankers to create the nation’s circulating medium, they address the replacement mechanism of monetary sovereignty (hint above in Monetary Authority).

Government Creation of Money
(12) Under a 100% requirement, the Monetary Authority
would replace the banks as the manufacturer of our
circulating medium. As long as our population and trade
continue to increase, there will, in general, be a need for
increasing the volume of money in circulation. The
Monetary Authority might satisfy this need by purchasing
and retiring Government bonds with new money. This process
would operate to reduce the Government debt. This means
that the Government would profit by manufacturing the
necessary increment of money, much as the banks have
profited in times past, though, they do not and cannot
profit greatly now because of the costly depression,
largely a result of their uncoordinated activities. That
is, the governmental creation of money would now be
profitable where the bankers’ creation of money can no
longer be profitable, for lack of unified control.

And then finally, they address the matter obviously before us, the inevitability of failed monetary policy under fractional-reserve banking.

The 100% Reserve System May Be Inevitable
(17) There are two forces now at work which are tending
silently but powerfully to compel the adoption of the 100%
reserve plan:
(a) Short-term commercial loans and liquid bankable
investments other than Government bonds are no longer
adequate to furnish a basis for our chief medium of
exchange (demand deposits) under the fractional reserve
system. Capital loans are inappropriate for this purpose.
As time goes on this inadequacy will grow far worse. Under
the present fractional reserve system, the only way to
provide the nation with circulating medium for its growing
needs is to add continually to our Government’s huge bonded
debt. Under the 100% reserve system the needed increase in
circulating medium can be accomplished without increasing
the interest bearing debt of the Government.

You, and we, are here.

So, Bill, there you have it. A friendly address from the social science school of Frederick Soddy, recalling that the result of his original scientific finding was that fractional reserve banking is a confidence game.

Games up.
With my apologies for the length to all ……. readers.
All the best.JOEBHED.”

“When a bank loan becomes a deposit, where does it get the “money” to deposit. It has used the “stored money” of a depositor to make the loan does bank A deposit that money in bank B?”

It doesn’t “get” the money from anywhere, is what I understand. It creates the money. Now, that doesn’t mean it can create an unlimited amount. I could be wrong here, but I think a banks ability to create money is only limited by it’s capital. Meaning, for every new loan (and theore deposit) it creates, it must have some portion, or percentage, of capital to “back it up”…does that make sense? To be honest, I’m confused about this aspect of the process.

But, it seems well established, among the Modern Money community, that loans are not made from “stored” money.

JK, “I could be wrong here, but I think a banks ability to create money is only limited by it’s capital.
As Alan Greenspan said,”I have spent my entire working life using a flawed system”
If a bank were limited by its capital it would be on a 100% reserve system.
But banks greed exceed all imaginary boundries so they decide to have financial institutions create loans and money “off the regulated banking books” that at present count (as recorded by OCC (Office of Comptrollor of the Currency) US institutions account for $237 trillion in derivatives. Albeit this is “betting money”(credit) it will become cash when the bets have to be settled. This begs the question,
How much cash would the Feds have to “print” if the losses are 20% ? 47,4 trillion or ,does anyone out there know how to prepare for that kind of panic from the currency if there is a default, ah a ” systemic failure” ?
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” — Ludwig von Mises
A SOLUTION !!!!!! “Don’t End The Fed, Amend The Fed”
The Fed has the power to declare 100% reserve.
The Fed has the power to loan the trillions needed to deleverage ALL the positions of the private for profit banks and financial institutions. Get out of being the stupid guarantor and become the revenue making direct lender. So help us God, we the people shall see properity instead of servitude.

jonf | July 31, 2012 at 5:55 pm | I’m sure I am missing something but here goes. So this fella John borrows money from the bank. He then uses the money to buy a tsy bond. The Treasury now uses the money to buy flowers from John. John now uses the money to pay off his loan at the bank.”
First of all John can not pay off that loan from the private for profit bank because the proceeds from the purchase of the bond for the Treas cannot but enought flowers to pay off the loan because of “interest due”. Evey loan requires money from a third source in order to be repaid. With a greater interest rate and a longer length of time it may even be too expensive to repay.
Also note that when John borrowed the money “the bank issued that currency backed by the full faith and trust of GOVUS” who would have to print that money only if needed if FDIC is called upon.
For example :(Fact) Bank of America has placed $88 trillion under FDIC protection by putting derivatives “on its books” . If upon de leveraging they have a loss of only 10% (more like 20%) the “full faith and credit of GOVUS will be asked to put up or else.
Credit expansion is a currency killer. But the solution could be 100% liquid lending and the only one capable of that is the Fed under present law and conditions. Is it not so, that the Fed “can purchase an unlimited amount of assets to insure its mandates? “Don’t End The Fed, Amend The Fed”

I apologise for using so much space, but please an article, “Want Jobs? Forget the Fed!
Posted on July 25, 2012 by Dan Kervick By Dan Kervick” Please a new one “Want Jobs? Amend The Fed!
May God continue to bless America.